Global investigations: Nowhere to run

The first session of the afternoon tackled key aspects of global investigations from an in-house and external adviser perspective. Clifford Chance partner Judith Seddon began by looking at deferred prosecution agreements (DPAs) and self-reporting. She posed the question: ‘How effective are DPAs in changing corporate behaviour? From a corporate-governance perspective, does the failure-to-prevent offence focus the board’s attention on the importance of ensuring it has adequate or reasonable procedures?’

In her view, the Serious Fraud Office (SFO) regards DPAs as an incentive for a corporate to put in place processes to ensure compliance, but it has recognised that there is a fine line between incentivising companies to put things right and to confront economic crime.

She pointed out that the SFO considers voluntary disclosure to be a key factor. But Rolls-Royce – in one of only four DPAs to be announced so far – did not self-report. ‘The SFO said that this does not set a precedent and that advisers should not advise their clients to sit tight. They would say that, would they not? It does set a precedent. What I suppose it also does, however, is it sets a precedent for the degree of co-operation that a company has to show to compensate for the failure to self-report. Rolls-Royce was described by Leveson as the most challenging DPA to date and, if not this case, then when would the SFO prosecute?’

The SFO has been keen to stress that Rolls-Royce does not mean the death of self-reporting, describing it as still a key feature of the profile of a case suitable for resolution by a DPA. However, following the recent Eurasian Natural Resources Corporation decision, that element of control has dissipated. A company must now accept the risk that, in self-reporting, its ability to control disclosure of its internal investigation is much more limited.

Seddon concluded by pointing out that there are upsides and the benchmark for discounts on penalty appears to be becoming established in the UK. A higher discount of 50% is now regarded as the norm, whereas for a guilty plea it is a maximum of a third. That seems to reflect the approach taken in the US, where the Foreign Corrupt Practices Act (FCPA) programme also cites a discount of 50% being available to companies that self-disclose and then later self-report.

David Entwistle, global head of regulatory governance and enforcement at Deutsche Bank’s anti-financial crime department, talked about the difficulty in establishing corporate liability for crime, noting that the Justice Ministry’s call for evidence earlier this year on corporate liability for economic crime shows that there is a political push for a new corporate crime regime. This has been a stress point since 2008 for financial services in particular. However, he asked: ‘Is this all really as problematic as suggested? Would wholesale legislative change really help bring about more accountability and, let us face it, punishment?’

Entwistle observed that financial services organisations are being significantly punished under the current regimes. The government justifies strict liability offences as a matter of promoting good governance, which is hard to argue with. ‘Criminalising a financial services company – particularly a bank – has to be justified as the consequences go far beyond fines and reputations. A criminalised firm may lose its licence and if a major bank were to cease operations that would have a global economic impact.’

‘The SFO said that Rolls-Royce does not set a precedent and advisers should not advise clients to sit tight. They would say that.’
Judith Seddon, Clifford Chance

This led him to conclude by asking whether a simplified corporate criminality test plus public-policy concerns around the impact of corporate conviction would lead to heavier reliance on DPAs for prosecutors.

EY partner Jonathan Middup picked up the theme, noting that the Bribery Act has paved the way for businesses to take failure-to-prevent legislation in all of its various forms seriously. Enforcement activity is on the rise through the Bribery Act, and the same thing is likely to happen with failure-to-prevent tax evasion. Failure to prevent economic crime is in its infancy at the moment and needs a lot of work.

He noted: ‘However, while you might expect to be able to take the structures that exist for anti-bribery and corruption and hang a different risk universe on them as the steps that you are going to take are the same, there are some practical barriers. Not least that the people in this room, general counsel, etc – might be very specialist in looking at anti-bribery and corruption but do not feel that taking on risks around failure to prevent the facilitation of tax evasion is something that they know enough about.’ He added that ownership of the issue within business is ‘a hot potato’, in that a lot of companies have not found a home for this legislation yet.

Both section 7 and the facilitation of tax evasion have made it to the boardroom table, and most businesses are now engaged in carrying out a failure-to-prevent risk assessment of some kind on tax evasion in particular. However, not all companies have done enough. HMRC could not be clearer in saying that just amending your policies and rolling out some training does not provide a reasonable procedures defence.

However, Middup pointed out that HMRC is willing to have a discussion with business, in a different approach to the SFO. ‘The SFO will be an enforcer of the failure to prevent tax evasion, so I do not know quite how those two things match off against each other. HMRC is not starting this legislation with a blank canvas. It is being quite vocal in saying: “We are not going to expect the same phony war that we had between July 2011 and the first section 7 offences coming through in the Bribery Act.” It expects to be on to this quite quickly.’

Next Paul Laffan, head of anti-money-laundering and financial crime at State Street Bank and Trust, and Joseph Smith, head of financial crime legal at Barclays, discussed areas that have had less attention but are still significant, namely changes to be introduced to the Proceeds of Crime Act. These include asking for consent to deal with a transaction which might otherwise be considered money-laundering, and also a new concept that is developing across the UK around how organisations can formally share information about suspicious activity.

The idea around the new information-sharing gateway is that firms, where they have already formed a suspicion of money laundering or terrorist-financing, will be able to exchange intelligence with other firms in the regulated sector. It allows a firm to share information on an entirely voluntary basis for the purposes of then building up a bigger intelligence picture. ‘It comes at a time when we are seeing unprecedented initiatives within the financial services industry to work ever-more closely with law enforcement to share information. This is, essentially, a framework through which banks and other firms are able to share information with the National Crime Agency (NCA) in a more open format,’ said Smith.

Laffan added: ‘That could create an interesting dilemma when you have a feeling that something might be wrong but have not got to the point where you have clear suspicion of someone engaged in money laundering.’

Smith queried the incentive to share in circumstances where it is voluntary: ‘It may be quite slow to take hold. It remains to be seen what view the FCA has about the use of this provision. While it is entirely voluntary, there may be circumstances where a firm could be criticised for not having clearly considered whether their AML investigation could have been enhanced by sharing information with other members in the regulated sector. It remains to be seen how voluntary this is.’

Eleanor Davison of Fountain Court touched upon other new powers under the Criminal Finances Act – specifically unexplained wealth orders (UWOs). These give the High Court the power to make a UWO that requires a person who is suspected of involvement with serious criminality to explain the origin of assets that appear to be disproportionate to their known income.

‘A failure to provide a response will give rise to a presumption that the property is recoverable in order to assist any subsequent civil recovery action. The person can also be convicted of a criminal offence if they make a misleading statement in relation to the UWO application.’

Joseph Smith, Barclays: There are unprecedented moves in financial services to share intelligence

 

UWOs are designed to assist law enforcement agencies to get over the hurdle of obtaining evidence from other jurisdictions. UWOs can also be applied for in relation to politically-exposed persons and officials associated with them. UWOs have extraterritorial reach, in which case the High Court can make the order, and the enforcement authority can start to liaise with its opposite authority in the other state. The FCA also now has new civil recovery powers under section 20 of the act. It can now recover property in cases where there has not been a conviction but where it can be shown that, on the balance of probabilities, the property has been obtained through unlawful conduct.

‘The armoury for regulators is ever-increasing,’ said Damian Bisseker, head of litigation for Europe, the Middle East and Africa at Credit Suisse, before looking at how this fits in with the Senior Managers and Certification Regime (SMCR). ‘How does it affect the needle in terms of the willingness and ability of people – not just senior managers but also people within an organisation – to go to the regulator or to come out internally and make disclosures?’

As he explained, the SMCR was introduced to deal with the ‘Murder on the Orient Express defence’: collective or group liability. The regulators want to pinpoint responsibility to particular people.

‘The difficulty for senior managers and other people being material risk-takers within firms is that they are in a very exposed position.’

He added that there is increasingly a willingness to suspend or to claw back compensation. There are powers to imprison and impose unlimited fines. It can also mean a lifetime ban. ‘The question then becomes: how do you prevent people being so paralysed with fear that their whole career will be wrecked if something is disclosed, with the regulatory expectation that things are brought into the open and properly investigated?’

The key point is companies have a significant responsibility to ensure their whistleblowing regimes operate properly, and that staff who become subjects of investigations are given the support that they need – be that external legal support or an understanding that competent, ethically-grounded staff do sometimes make mistakes.

‘There has to be a willingness on the part of firms to stand by their employees and not throw them to the lions. On the part of the regulator, there has to be an understanding that firms also have to run their businesses and that investigations are done in a sensible and proportionate manner.’ LB

mark.mcateer@legalease.co.uk
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